Bleak Jobs Report Crushes Hopes for Stronger Hiring, Pressures Fed

American employers cut back sharply on hiring last month, crushing hopes that the job market was improving and putting more pressure on the Federal Reserve to give the sluggish economy another jolt.

The Labor Department said Friday that employers added just 96,000 jobs in August, down from 141,000 in July and too few to keep up with population growth. The unemployment rate fell to 8.1 percent from 8.3 percent, but only because many people gave up looking for work, so they were no longer counted as unemployed.

The latest numbers were "downright dismal," TD Economics senior economist James Marple said in a description echoed by many others.

The economy remains hobbled in the aftermath of the deepest recession since the 1930s and simply isn't expanding fast enough to spark more hiring. Consumers, whose spending accounts for more than two-thirds of economic activity, have been whittling down debts and spending cautiously. The government reported last week that economic growth clocked a disappointing 1.7 percent annual pace in the April-June quarter.

The economy is expected to grow at an annual rate of around 2 percent for the rest of the year, consistent with only 90,000 new jobs a month.

The disappointing numbers are a blow to President Barack Obama's re-election campaign. Unemployment is down from a peak of 10 percent in October 2009, but no incumbent president since Franklin D. Roosevelt has faced re-election with unemployment higher than 7.8 percent.

Republican presidential challenger Mitt Romney declared that "the weak jobs report is devastating news for American workers and American families ... a harsh indictment of the president's handling of the economy."

Obama said August's hiring was "not good enough" and it's "a long tough journey" to recover from the recession that officially ended more than three years ago.

Despite the bad report, stock prices rose, most likely on expectations the Fed will act next week. The Dow Jones industrial average rose 14.64 points to 13,306.64. The Standard & Poor's 500 rose 5.80 to 1,437.92.

The job market got off to a strong start this year. Employers added an average 226,000 jobs a month from January through March. But they couldn't sustain that pace, and hiring slowed to a monthly average of 67,000 from April through June.

It looked like things got back on track in July, when the government initially reported 163,000 new jobs, but the Labor Department revised that gain down by 22,000 on Friday.

The August jobs report looks even uglier upon closer inspection. The unemployment rate fell largely because 368,000 Americans dropped out of the labor force. The government counts people without jobs as "unemployed" only if they are actively looking for work.

The percentage of adult Americans either working or seeking work fell from 63.7 percent in July to 63.5 percent in August. That was the lowest percentage in 31 years. The percentage has been falling steadily since peaking at 67.3 percent in 2000.

"A declining labor force is not (a) sign of an improving economy," says Joel Naroff, president of Naroff Economic Advisors.

Hourly pay fell. Manufacturers cut 15,000 jobs, the most in two years. And temporary help jobs, which often signal where the job market is headed, dropped by 4,900 in August.

The economy lost 7,000 more government jobs last month. Since the recession ended in June 2009, federal, state and local governments have slashed 670,000 jobs, partially offsetting hiring by private companies.

It's the first time since World War II that governments have shed jobs this deep into an economic recovery. At this point — three years and two months— into the nine previous postwar recoveries, government jobs had risen an average of 8 percent. This time, they're down 3 percent.

Most of the government cuts have been made by states and localities. Some school districts in Pennsylvania, for example, have had to lay off teachers after the state cut subsidies.

Kayla Middleton, 26, was one of about 70 teachers furloughed this year by the Reading School District. Middleton says because she has such little seniority "I knew there was no way I was escaping."

The job creation and unemployment numbers come from separate surveys. One asks mostly large companies and government agencies how many people they employed during the month. This survey produces the number of jobs gained or lost.

The other is the household survey. Government workers ask whether the adults in a household have a job. Those who don't are asked whether they're looking for one. If they are, they're considered unemployed. If they aren't, they're not considered in the workforce and aren't counted as unemployed. The household survey produces each month's unemployment rate.

The downbeat jobs news convinced many economists that the Fed will come to the rescue. At its last meeting, the Fed's policy committee decided that action "would likely be warranted fairly soon" unless it saw evidence of "a substantial and sustainable strengthening" of the economy. Many economists expect the Fed to announce a third round of bond purchases at its Sept. 12-13 meeting. The goal would be to drive down long-term interest rates to stimulate borrowing and spending.

Europe is in or close to a full-blown recession, which could dent the exports that have been one of the U.S. economy's few sources of strength. And a debt crisis threatens to force several European countries to stop using the euro currency. The breakup of the 17-country eurozone could cause a global financial panic as countries replaced solid euros with local currencies of dubious value.

Political bickering in Washington could plunge the U.S. economy back into recession if Democrats and Republicans can't reach a budget deal by the end of the year. Under rules designed to force a compromise, failure to reach agreement would trigger $600 billion worth of spending cuts and tax hikes starting next year. The draconian moves would send the economy over a so-called fiscal cliff and probably into recession.

Still, Sherry Cooper, chief economist at BMO Financial Group, saw reasons for optimism. Europe could be rescued by the European Central Bank, she says.

On Thursday, ECB President Mario Draghi unveiled an ambitious plan to buy unlimited amounts of European government bonds to help lower borrowing costs for countries straining to manage their debts.

Cooper also noted that "the U.S. housing market is finally on the upswing."

Pinnacle Homes, a construction-management company in Las Vegas, shrank from 20 employees to seven after the housing market collapsed five years ago. Company president Frank Wyatt says business is slowly picking up, but "we're not ready to add anybody yet."

For now, the American economy remains sluggish, and 12.5 million Americans are locked out of jobs. Megan Baker, 23, of Warrenton, Va., has "been applying to jobs almost nonstop" since she graduated from college last year. She hasn't landed one yet. Usually, she doesn't even hear back.

"I have applied to so many jobs that I've lost track," she says. "I try to tailor my resume and cover letters to each job, but now I am just becoming discouraged and want to give up."